Rules and Regulations.
IRS Announces Halt To Certain Lump-Sum Offerings
The Internal Revenue Service (IRS) has changed its position on lump-sum windows for retirees in pay status. On July 9, the Treasury Department and IRS issued Notice 2015-49, which amends the required minimum distribution (RMD) regulations under Section 401(a)(9) of the Internal Revenue Code (IRC). It prohibits sponsors of qualified defined benefit (DB) plans from adopting lump-sum windows for participants and beneficiaries who receive annuity payments. Certain lump-sum window amendments adopted or authorized before July 9 are not affected by the new guidance.
DOL Clarifies Annuity Selection
In Field Assistance Bulletin (FAB) 2015-02, the Department of Labor (DOL) responds to a recurring comment about the safe harbor rule regulation it issued in 2008 regarding the selection of annuity providers under defined contribution (DC) plans and the scope of fiduciary obligations with respect to annuity selection under these plans. In particular, it discusses how to reconcile the "time of selection" standard, which embodies the general principle that the prudence of a fiduciary decision is evaluated under the Employee Retirement Income Security Act (ERISA) based on the information available at the time the decision was made.
According to the bulletin, the "time of selection" means: 1) the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary, or 2) the time that the annuity provider is selected to supply annuities as a distribution option for participants or beneficiaries to choose at future dates.
Additionally, the bulletin says that the frequency of periodic reviews to comply with the safe harbor rule depends on the facts and circumstances. The guidance in the bulletin is limited to the selection and monitoring of annuity providers for benefit distributions from defined contribution plans.
Appellate Court Weighs In on Posthumous QDRO
An appeals court determined that posthumous nunc pro tunc orders filed by the ex-spouse of a retirement plan participant in Connecticut are valid qualified domestic relations orders (QDROs)-and thus have sufficient standing to direct the flow of the deceased's retirement plan assets in three retirement plans he participated in. The ruling overturned an earlier district court decision that determined incorrectly that a divorce settlement agreement between a man and his ex-spouse qualified as a QDRO for all four retirement plans the man participated in. Both findings overrode his subsequent wife's claims to be beneficiary, though she was so named in various plan documents. The decision was handed down by the U.S. 2nd Circuit Court of Appeals.
The case again shows how important QDRO orders can be in determining posthumous retirement plan distributions-and how imperative for plan sponsors and advisers to ensure participants avoid critical mistakes when developing or filing QDROs.
DOL on 'Top Hat' Plans
The Employee Retirement Income Security Act (ERISA) exempts from many requirements "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees [HCEs]." In an amicus brief filed with the 4th U.S. Circuit Court of Appeals, the U.S. Department of Labor (DOL) says the word "primarily" is an adverb that modifies the prepositional phrase "for the purpose of providing deferred compensation" that immediately follows it. It does not modify the more remote prepositional phrase "for a select group of management or highly compensated employees."
According to the brief, this means that while the most important purpose of the plan must be to provide deferred compensation to a select group of management or highly compensated employees, a top hat plan may have other, secondary, purposes, such as retaining top talent, allowing highly compensated individuals to realize earnings in later tax years with presumably lower marginal tax rates, or avoiding limitations in the Internal Revenue Code (IRC) that apply to tax-qualified plans. The DOL says it does not mean that the "select group" may be primarily composed of management or highly compensated individuals. Nor does it mean that a top hat plan may have a secondary purpose that is inconsistent with the primary purpose, such as covering individuals who are outside the "select group" set by statute.